City comment

City comment

Edited by Neil Collins

(Filed: 24/07/2004)

Spicing up Abbey's footwork

The bank we must now call Abbey has made a habit of collecting takeover approaches. Bank of Scotland, Lloyds TSB, Bank of Ireland and National Australia have all sidled up over the past few years. Lloyds TSB was saved from disaster by government intervention and none got as far as launching proper takeover bids. Maybe it will be fifth time lucky when Banco Santander's board meets on Sunday. After all, Abbey is pledging to "turn banking upside down".

Chief executive Luqman Arnold, halfway through his three-year mission of returning Abbey to its roots as a lively competitor, has largely succeeded in defusing the two timebombs that he inherited. Most of the £60 billion of wholesale banking assets gathered in folly under former chief exec Ian Harley have been offloaded. Mr Arnold has also injected enough cash into its life insurance operations to meet the Financial Services Authority's tough solvency standards.

Abbey no longer looks like it might implode. It simply seems out of its depth on the high street. Rebuilding customers' trust is trickier, as Mr Arnold is discovering after over-promising on customer service. Perhaps he was always planning to sell after his turnround.

He is an investment banker, after all, and has privately admitted he is agnostic about whether the bank remains independent. Abbey's shares may be far from their £13 peak of 2001 but, given investors' recent pain, selling for close to £6 when analysts had £4 price targets only months ago would be a reasonable result.

Santander has no chance of matching the potential cost savings from another domestic merger, but these are hard to pull off. Royal Bank of Scotland, the sector's top predator, could surely not avoid a reference to the Competition Commission. It's odds-on that a bid would be blocked, even though the grounds for refusing Lloyds look irrelevant now. As for Santander, it shares the ambition of all the big boys for cross-border European banking but it would certainly be turning conventional wisdom upside down if it can make it work.

Ambulance chasers and the asbestos nightmare

It would be hard to find a better example of the clash between two well-meaning waves than the swirling mess at Federal Mogul, the US-owned car component makers whose workers and pensioners are feeling increasingly anxious about their futures.

Federal owns T&N, which used to be called the asbestos giant in the days when asbestos was a good thing. We know better now. Asbestos has made fortunes for American lawyers, whose ambulance-chasing activities have bankrupted every company that mined it and most of those which used it, including Federal. Liability insurers have also been brought to their knees, while the claims - many from people with no symptoms of any disease - continue to roll in.

T&N was a paternalistic employer, and (together with Federal's other UK businesses) boasts over 21,000 retired employees, as well as 15,000 former employees in its scheme. There are just 4,119 members who are actually contributing, and this week Federal's British administrators won the right to put some of their contributions into a new scheme.

It's not hard to see why; the old scheme has assets of £960m, and an estimated shortfall of £875m - or nearly a quarter of a million pounds per active member. Even without the millstone of the asbestos claims, the business is simply too small ever to generate enough to bridge this gap. The whole of Federal made just $11m before tax in its second quarter.

The best hope for the members is for the schemes to stay alive until the new pensions legislation comes into force. At that point, it becomes an industry problem, obliging the dwindling number of solvent schemes to stump up to meet the liabilities.

Such a move would weaken the remaining schemes and might drive some over the edge, triggering yet more burdens on the rest. The real nightmare, of course, is that the asbestos compensation industry might find a way to break through to the assets of the Federal pension scheme. Nobody who has seen the relentless progress of the claims, and the ingenuity of the lawyers, would say for certain it couldn't happen.

Another case of nursing the Scots

Health minister Stephen Ladyman is taking quite a risk when he dares criticise anything Scottish. After all, an uncomfortably large number of his colleagues in the Government have escaped from the far north, and it never does to draw attention to the blatant favoritism shown to the faithful Labour voters there. Mr Ladyman reckons it's "crazy" of the Scots to offer free personal care to the elderly, since it will cost them far more than they can afford - to which the obvious answer is: it depends who's paying. The answer to that is: the English.

Public spending in England has now risen to £5,453 for every inhabitant (2002-03 figure) but in the Chancellor's beloved homeland, following yet more subsidy in his latest spending review, the figure will be a stonking £11,000 for every man, woman and child. That's getting on for £1,000 a week for a family of four, and even if millions have been wasted on the ridiculous Scottish parliament building, it still leaves scope for largesse beyond the dreams of spending authorities in England.

The crumb of comfort to the English is that Mr Ladyman says that the backlog of claimants who should have had their nursing care paid for by the state will be cleared by the end of the month. We'll see.